Hedgie's Market Edge - July 20, 2025

🦔 Welcome back to another week of breaking down what's really moving markets! The S&P 500 hit fresh all-time highs this week, up 0.6% and now sporting a 7.1% gain year-to-date. The index has surged over 26% since those April 8 lows when tariff panic gripped investors.

But here's what caught my attention: while markets keep grinding higher, the economic data tells a more nuanced story. Understanding why stocks are rising despite ongoing uncertainty will help you navigate what comes next.

THREE PILLARS HOLDING UP THE RALLY

1. Inflation Stays Contained Despite Tariff Fears

The June CPI came in at 2.7% year-over-year, just a tick above the 2.6% forecast but still well within reasonable bounds. More importantly, Producer Price Index (PPI) inflation actually came in below expectations at 2.3% versus 2.5% forecasted.

This is the number everyone was watching. PPI is where tariff impacts should show up first since it measures wholesale prices. The fact that it's running cooler than expected suggests either tariff effects are being absorbed by suppliers and companies, or the economic impact isn't as severe as feared.

Average U.S. tariff rates have jumped from 2.4% to 20.6%, the highest since 1910 according to Yale Budget Lab. The Treasury collected almost $27 billion in tariff revenues in June alone. Yet inflation has remained manageable, at least for now.

2. Consumer Spending Holds Up Better Than Expected

June retail sales jumped 0.6%, crushing the 0.1% forecast and reversing May's -0.9% decline. Consumers spent on autos, auto parts, apparel, and food services. The only weakness showed up in home furnishings and appliances, which makes sense given those categories saw price increases from tariffs.

Since consumption drives about 70% of U.S. GDP, these retail numbers provide crucial insight into economic health. The resilience here suggests households still have spending power despite higher costs on some goods.

Why are consumers still spending? Lower energy costs help. WTI crude has stayed largely in the $60-70 range this year, providing relief at gas pumps and reducing business energy costs. This offsets some of the tariff-driven price increases.

3. Corporate Earnings Beat Rock-Bottom Expectations

About 12% of S&P 500 companies have reported Q2 results, and 86% have beaten expectations. That's well above the 10-year average of 75% beat rates. Financial companies led the upside surprises, with JPMorgan and Goldman Sachs reporting better trading revenues and capital markets activity.

The key context: earnings expectations got slashed over recent months. Q2 growth forecasts fell from 11% annually at year-start to just 5% by late June. When the bar gets set this low, companies can clear it more easily.

Full-year earnings are likely to end in the mid-to-high single digits, with potential for double-digit growth in 2026 if rate cuts materialize and tariff uncertainty clears.

THE REALITY CHECKS AHEAD